IN T R O D U C T I O N

OF

CO M P A N I E S
 Reliance Industries Limited
The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private
sector enterprise, with businesses in the energy and materials value chain. Group's annual
revenues are in excess of US$ 28 billion. The flagship company, Reliance Industries Limited,
is a Fortune Global 500 company and is the largest private sector company in India.

Backward vertical integration has been the cornerstone of the evolution and growth of
Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward
vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum
refining and oil and gas exploration and production - to be fully integrated along the materials
and energy value chain.

The Group's activities span exploration and production of oil and gas, petroleum refining and
marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles,
retail and special economic zones.

Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre
producer in the world and among the top five to ten producers in the world in major
petrochemical products.

Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance
Retail Limited) and Reliance Industrial Infrastructure Limite

Reliance Industries Limited (RIL) is India's largest private sector company on all major
financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion), cash profit of
Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional income) of
Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of
March 31, 2008
 Reliance Petroleum Limited:
Reliance Petroleum Limited ("RPL" or the "Company"), was set up to harness an emerging
value creation opportunity in the global refining sector, one of India's largest private sector
company with a significant presence across the entire energy chain and a global leadership
across key product segments. Currently, RPL is subsidiary of RIL.

RPL was formed to set up a greenfield petroleum refinery and polypropylene plant in the
Special Economic Zone (SEZ) at Jamnagar in Gujarat. This global sized, highly complex
refinery is being located adjacent to RIL's existing refinery and petrochemicals complex,
which is amongst the largest and most efficient in the world, thus offering significant
synergies.

The commissioning of the RPL refinery catapults Reliance into the league of the largest
refiners globally, both in terms of complex refining capacity and earnings potential. With the
completion of the RPL refinery, Jamnagar has emerged as the ‘Refining Hub of the World’
with the largest refining complex with an aggregate refining capacity of 1.24 million barrels
of oil per day in any single location in the world.

The state-of-the-art, globally competitive RPL refinery has been completed in 36 months
from concept to commissioning, which is a new benchmark for building a grass-root refinery
of this scale and complexity. This refinery has been built with a significant capital cost
competitive advantage. This record has been achieved in spite of the significant shortfall in
engineering and construction resources that has impacted most other refinery projects
globally. RPL achieved the milestone by leveraging the project management skills of the
Reliance group together with world-class implementation partners like Bechtel, UOP and
Foster Wheeler amongst others.
MERGER HIGHLIGHTS
 Merger Highlights:
Merger Rationale:

• Unlock synergies from combined operations

o Crude sourcing,
o Product placement,
o Supply Chain Optimization

• Greater flexibility in operations planning

• Expansion of refined product range

• Optimized utilization of secondary process units and infrastructure

• Efficient utilization of combined cash flows

• Integrated energy companies consistently get higher valuations vis-à-vis pure refiners;
Mitigate Holding Company discount

• EPS accretive

RIL to enhance its competitiveness in energy value chain

• Diversified businesses:
 o Oil & gas, refining and marketing, petrochemicals, organized retail and
developmental of SEZ
o Wider avenues for fund deployment

• State of the art Refinery

o Superior product slate with higher margins
o Operating in cyclical industry

Merger Details:

• Under the terms of the proposed merger, RPL shareholders will receive 1 (one) share
of RIL for every 16 (sixteen) RPL shares held by them.

st
• The appointed date of merger of RPL with RIL is 1 April 2008. The takeover is
subject to approvals by the high courts at Mumbai and Ahmedabad.RIL will cancel its
holding in RPL.

• Based on the recommended merger ratio, RIL will issue 6.92 crore new equity
shares to the existing shareholders of RPL.This will result in a 4.4% increase in
equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the promoter
holding in RIL will reduce from 49.0% to 47.0%

• Advisors to the merger are as follows:

o Valuation Advisors : Ernst & Young Pvt. Ltd. and

Morgan Stanley India Co. Pvt. Ltd.

o Transaction Advisors : JM Financial Consultants Pvt. Ltd. and

Kotak Mahindra Capital Co Ltd.

• Fairness Opinion : DSP Merrill Lynch Ltd. (for RIL) and

Citigroup Global Markets India Pvt. Ltd

(for RPL)
• Legal Advisor : Amarchand & Mangaldas & Suresh A. Shroff

• Co. Tax Advisor : PriceWaterhouse and Coopers Pvt. Ltd.

• The proposed merger is subject to all necessary approvals. All other procedural
aspects of the proposed merger, and the timetable for implementation, will be
communicated separately.

• In the list of world's largest refining companies, RIL will become the 17th largest firm
after the merger. The list is led by Exxon Mobil with a massive 5.6 million barrels
per day (mbpd), followed by Shell with 4.6 mbpd and Sinopec’s 3.8 mbpd refining
capacities.

Why the merger?

• Given this context, the prime motivating factors for this merger appear to be to gain
“dinosaur”-like size which will strengthen RIL’s balance sheet. In the short term, it
may also help the company play down the expected under-performance in the current
fiscal.

• The way to look at the merger though is that it was always waiting to happen. There
seem to be two main reasons why RPL was floated.

• First, to get SEZ benefits, the refinery project had to be housed in a separate company.
The refinery would not have been eligible for the tremendous benefits from its SEZ
status had it been just a project on RIL’s balance-sheet.

• It is not clear now though whether the merger will impact the SEZ benefits but
statements by government officials seem to imply that there will be no issues on this
score. Second, RIL will now be able to add a new, state-of-the-art refinery asset to its
balance-sheet with just a tiny equity expansion. RIL holds 70.38 per cent of RPL’s
equity now; Chevron holds 5 per cent with the balance 24.62 per cent with the public.
• When the original RPL was merged in 2002, RIL shares accruing to itself by virtue of
its direct 28 per cent holding in RPL were extinguished; only those held by group and
associate companies, which were a small percentage, were transferred to a treasury
trust.

• Assuming that similarly, the 70.38 per cent shares held by RIL in RPL are
extinguished; that Chevron’s holdings are bought back by RIL and extinguished; and
assuming a share exchange ratio of 1:16 (based on Friday’s closing price of Rs 1,265
for RIL and Rs 76 for RPL), RIL will have to issue 6.92 crore fresh shares that will
see its equity increasing from Rs 1,454 crore to all of Rs 1,522 crore!

• While the number of shares issued could be marginally higher based on the exchange
ratio, the fact remains that the addition to RILs equity will be nothing compared to
what it might have been had the Rs 27,000-crore refinery project been executed on its
books.
• RIL has traditionally set up large capital-intensive projects under new companies to
ring-fence itself from project risk.
• This happened with the first Jamnagar refinery, also called Reliance Petroleum. Now
that RPL is up and running, it doesn’t make sense to keep it separate.
• RIL has not issued any statement. There is speculation that RPL is sitting on
inventory losses and may need balance sheet support from RIL.
• RPL enjoys a 7-year tax break while the export-oriented status of the first unit of the
Jamnagar refinery, which is part of RIL, will expire soon.
• Chevron bought a 5% stake in RPL in 2006. It had the option to increase it to 29%
before July 2009, and the speculation was that the merger would follow. The non-
exercise of this option hastened RIL’s decision to fold its 70% subsidiary into itself.
• Derives synergies from combined operations — crude sourcing, product placement,
supply chain optimization.
 Impact of Merger Proposal:

• RIL among top 10 private sector refining companies globally

• RIL already earns two-thirds of its revenues from refining, an industry that is facing a
multi-year cyclical downturn. This merger would double RIL's refining capacity,
thereby making its non-refining revenues negligible.

• Will own 2 of the world’s 3 largest, most complex modern refineries

• Will be the world’s largest producer of ultra-clean fuels at a single location

• Among 50 most profitable companies globally

• Among five largest producers of Polypropylene

• This will tie RIL's fortunes more closely to the refining cycle, which is globally
entering a stage of depression.
 • On the positive side, there will be a huge contribution to RIL's bottom line from sale
of Krishna Godavari gas.

• The company, which pays only a 11% minimum alternate tax, can now use the
depreciation from RPL plant to lower the profit of the combined entity and save on tax.

• The merger is unlikely to have any impact on the tax holidays enjoyed by RPL, since
they are bestowed upon the refining unit operating inside the special economic zone,
rather than on RPL as a company.

• The tax benefits are expected to continue without any change. However, it will have
an indirect beneficial impact due to the transfer of depreciation of RPL's plants to RIL's
profit & loss accounts.

• Merger can improve the product slate of RIL with more focus towards light and
middle distillates. It could also facilitate access to various quality of crude oil
globally thus minimizing cost. The product mix would be flexible enough to optimize
production to earn better refining margins.

• Cash generation out of RPL could be used to deploy in exploration business in long
term rather than seeking support from external borrowing. Similarly short term
working capital requirements for RPL could be fulfilled by surplus cash in balance
sheet of RIL. Thus we believe this merger could reduce cost of capital of the
combined entity.

• Share Holding Pattern:

Dec-08 Post Merger

Promoter Group 49.0 47.0

Held by RIL Subsidiaries 6.0 5.7

Banks and FIs 6.5 6.9

Mutual Funds 2.5 2.7

FIIs 15.5 15.1

GDRs 3.7 3.6

Public 16.7 19.0

TOTAL 100.00 100.0

 • Dilution of Promoter’s stake in RIL:

o The promoter stake got diluted by 2% post merger for swap ratio of 1:16
and treasury share from RPL got extinguished. Thus treasury shares were
maintained at 20 cr post merger.

All figures in Cr unless specified

Numb er of shares RPL 450.00
Reliance stake (75.38%) 339.21
Non promoter stake (24.62%) 110.79

No of RPL shares for 1 RIL share 16.00

No of RIL shares to be issued to non promoter 6.92

Numb er of shares RIL(1) 157.30

Shares entitled to RPL shareholders(2) 28.13
Trea sury shares cancelled(3) 21.20
Total shares post merger(1+2-3) 164.22

Trea sury shares existing 12.7%(4) 19.98

Equity net of treasury earlier(1-4) 137.32

Equity net of treasury post RPL merger 144.25

Existing promoter stake 49.03%

Post merger promoter stake 46.96%
Promoter dilution 2.07%
• Valuation:

o The merger will unlock significant operational and financial synergies that
exist between RIL and RPL.

o It can improve the product slate of RIL. It could also facilitate access to
various quality of crude oil globally thus minimizing cost. Company’s
consolidated earning estimates are under review.

o Company maintain his Outperformer rating on the stock with target price of
INR 1540 for RIL; however, company’s conviction for upside potential has
got stronger.
 Thin Arbitrage for Traders:

Whenever a merger is announced and the swap ratio becomes public, the shares of the
company typically trade at a discount to the implied swap ratio. The arbitrage opportunity in
the extinguishing company's share depends on liquidity. The merger was announced after the
closing bell on Friday and the swap ratio was declared before the opening bell on Monday.
The swap ratio of 1:16 was the same ratio as the closing price of the two stocks on Friday 27
feb.2009, leaving no room for arbitrage. Investors and traders try to speculate on the swap
ratio, which is usually announced a few days after the boards have approved the proposal.
The deal will be effective from 1st April 2009.

RIL RPL RATIO

Current price 1224 76 16
1 Month avg. price 1313 83 15

The merger ratio, therefore, is more likely to favour RIL than RPL. Again, speaking of
history, RIL has set the swap ratios for earlier mergers at a CAGR of 8-10% from IPO price.
RPL's IPO (in April 2006) was priced at Rs 60. The RPL share price on Friday was Rs 76
(exactly at 8% CAGR). A 10% CAGR would mean a share price of Rs 80
 CMP Recommend No of Shares GAIN
ation
RIL(fut.) Above SELL 1lot (300
1240 shares)
RPL Below 76 BUY 4800 shares 2%
approx

How to benefit from the opportunity:

One can sell the RIL April future above 1240 that amounts to be 3, 72,000 and at the same
time can buy the 4800 share of RPL at the level of 76 or below that would amounts to
be 3,64,800. That clearly gives the gain of 2% approximately. Thus arbitrage opportunity
thus exists in the amalgamation to benefit the traders and investors.

C ONCLUSION
 Conclusion:

• We believe the deal is a win-win situation for both companies, as RIL will have
improved Cash-flow, stronger Balance Sheet and lower cost of capital post merger.

• For RPL shareholders, the merger is expected to reduce Earnings volatility and allows
them to participate in RIL's full energy value chain.

• Both the companies have lots of benefit and synergy between each other. The merger
will unlock significant operational and financial synergies that exist between RIL and
RPL.

• It creates a platform for value-enhancing growth and reinforces RIL’s position as an

integrated global energy company.

• The merger will enhance value for shareholders of both companies. The merger is
EPS accretive for RIL. Through this merger, RIL consolidates a world-class, complex
refinery with minimal residual project risk, while complementing RIL’s product
range. There will be further gains from reduced operating costs arising from synergies
of a combined operation.